The Business, Energy and Industrial Strategy Committee published its First Report of Session 2016–17 on , HC 84 on 31 October 2016. The Government’s response was received on 20 January 2017 and is appended to this report.
I am enclosing the Government’s response to the Committee’s recent inquiry into access to finance. I read the Committee’s report with great interest and would like to thank you and the Committee for your insightful recommendations.
You will not be surprised that I whole-heartedly agree with the report’s emphasis on the underlying issues that affect demand for finance, in particular awareness on the part of SMEs of their finance options. Access to information and advice on finance options is an issue that the Competition and Markets Authority has also highlighted as you may be aware. The department is working with the British Business Bank and a range of other partners to promote greater awareness, in particular through the Business Finance Guide.
I also agree that we should focus our efforts on ensuring that scale-up businesses can access the finance and other support they need to grow. Progress in this area would have a disproportionate impact on jobs and wealth creation. I am sure we will be returning to this topic in future hearings of the Committee.
Thank you again for your recommendations and I look forward to working with you and the other members of the Committee during the year ahead.
The Government welcomes the Business, Energy and Industrial Strategy Committee’s inquiry into access to finance. It is important to ensure that every business in the UK is able to access the finance it needs to grow.
As the committee’s analysis shows, the supply of finance remains adequate for the majority of businesses, with the SME Finance Monitor of September 2016 showing that only 5% of SMEs surveyed thought access to finance was a major obstacle – down from 11% in 2012. However the Government shares the concerns of the committee that lack of demand for finance is a constraint on economic growth.
One aspect of this problem is ‘discouraged demand’ which describes businesses who have been put off applying by their bank or who have the perception that they will be rejected. British Business Bank survey evidence finds one-in-three of those not offered the full amount of finance they seek will give up their search rather than seeking finance elsewhere. The Government’s finance platforms referrals policy launched on 1 November 2016 will help SMEs whose finance applications have been declined by their bank explore alternative finance options more easily than ever before.
The Government welcomes the committee’s focus on scale-up businesses and looks forward to working with the committee in the future to consider how best to identify and support scale-up businesses. The Government is committed to addressing the barriers faced by firms with the ambition and capacity for growth.
One such barrier is a lack of awareness of the range of finance options available. The Government shares the Committee’s view on the value of the Business Finance Guide as a resource for SMEs in this area. The same issue was also identified in the Competition and Market Authority’s recent retail banking market investigation. BEIS is working with the British Business Bank to promote the use of the Business Finance Guide more widely, including by advisers in the accountancy, legal and banking sectors.
Another area where businesses face barriers in accessing finance is start-up loans. The Start-Up Loans programme has supported over 42,000 entrepreneurs to date, and is well on its way to achieve the Government’s manifesto commitment of having issued 75,000 Start-Up Loans by the end of this Parliament. The first-year evaluation report of the programme has confirmed that the programme is meeting its objectives of increasing the rate of business creation in the UK and promoting entrepreneurship. The British Business Bank regularly assesses the market gap in access to finance for small businesses, including start-ups, and agrees an annual business plan with Government including the proposed resource allocation between its programmes for the coming year.
As regards equity finance, the Committee raises concern about the distribution of equity across different parts of the economy. The Government recognises this concern, which is why it has worked closely with the British Business Bank to set up dedicated investment funds for regions outside of London and the South East, in particular, the Northern Powerhouse Investment Fund (NPIF) and the Midlands Engine Investment Fund (MEIF). Taken together, these will provide over £650 million to businesses across these regions.
We recommend that the Government directs resources towards promoting the SEIS, EIS and VCT schemes. This includes the British Business Bank working with HMRC to consider how to improve promotion of the schemes.
The Government welcomes this recommendation. Tax advantaged venture capital schemes play an important role in encouraging individuals to invest in higher-risk small and growing companies that would otherwise struggle to access finance. The Government works closely with industry representatives to ensure the schemes provide effective support, and will continue to explore ways to raise awareness of the schemes.
The British Business Bank’s website provides access to HMRC resources on these schemes; this includes linking to HMRC’s web training portal and information on investment schemes. The Business Finance Guide contains a section titled ‘a helping hand from HMRC’. This section is included in both online and printed versions of the Guide and describes the range of tax advantaged venture capital schemes, with links to further information. The British Business Bank has already used HMRC communication channels to promote the Guide to SMEs and is looking to do so again. The Bank is also in contact with the EIS Association to explore ways of working together.
We recommend that the Government identifies the size of current European Investment Bank contribution in the UK economy, the timetable for current commitments, and make a clear statement on Government plans to ensure that the current level of funding will not be reduced.
The European Investment Bank is a source of finance for UK companies and infrastructure projects. Since 2006 the EIB has lent on average €5bn a year to UK companies with 2015 recording a high of over €7.7bn.
The European Investment Bank (EIB) owns a 60% share of the European Investment Fund (EIF) which is the principal EU institution supporting UK SMEs with access to finance.
The European Investment Fund has been and continues to be an important investor in UK venture capital. The Fund publishes a regular update about its investment activity in the UK, the latest of which shows that the EIF committed €2.3billion to UK equity funds from 2011 to 2015, €438m in guarantees and nearly €15m in microfinance.
In their statement on 28 June 2016 the EU Heads of State and Government made clear that while the UK remains a member of the EU it retains all the rights and obligations that this entails.
This includes membership of the EIB and while the UK remains a shareholder of the EIB we expect UK projects to continue to be eligible to receive EIB lending. The EIB themselves made clear in a statement on 24 June that the EIB’s engagement in the UK remains unchanged.
Since the result of the referendum on 23 June UK projects have continued to be approved and signed, including a recently-approved £750m loan to National Grid.
The future relationship between the UK and the EIB Group will be a matter for Article 50 negotiations and the Government will not be giving a running commentary on the progress of these negotiations.
We recommend that the Government and the British Business Bank build upon the success of the Angel CoFund, ensure it is funded adequately to meet demand, and consider how it could be expanded.
As of November 2016 the Angel Co-Fund has enabled 68 SMEs to secure £170m in investment. The British Business Bank has currently allocated £50m to invest in the Fund of which £30m is drawn and is leveraging significant investment from business angel syndicates. The British Business Bank will continue to monitor the Angel CoFund so that it is appropriately resourced to address the market gap at which it is targeted.
We recommend that the Government introduce a fifth performance indicator for the British Business Bank to assess its effectiveness in incentivising lending and investment activity in all parts of the UK.
Government is committed to ensuring that businesses in all parts of the UK are able to access the finance they need. This objective is shared by the British Business Bank, which is headquartered in Sheffield, is well represented around the country and invests broadly in proportion to the SME population.
The British Business Bank is the accountable body for the new £400m Northern Powerhouse Investment Fund (NPIF) and £250m Midlands Engine Investment Fund. One effect of these funds is anticipated to be that equity investment is more evenly distributed across the UK. The NPIF is expected to make its first investment in the first quarter of 2017. The British Business Bank also works closely with the Devolved Administrations to ensure that its schemes are appropriate to the needs of firms in Scotland, Wales and Northern Ireland and complement initiatives taken by the Devolved Administrations themselves.
The British Business Bank is doing this work within its existing performance indicators which cover the quantity of finance facilitated, the diversity of its sources, and the confidence of SMEs in accessing finance. The Government believes that introducing a new performance indicator could lead to a distortion of outcomes and complicate the Bank’s governance. For these reasons the Government does not intend to introduce a new performance indicator for the British Business Bank at this time.
We recommend that the British Business Bank explain to us, in the response to this Report, their strategy for promoting understanding of the Business Finance Guide, how it will identify and target hard to reach groups, how it will measure any increase in the awareness and take-up of alternative finance products, and its analysis of the feedback from SMEs on the Business Finance Guide. Furthermore, we recommend the Bank explain how they will analyse the volume of traffic to the online Business Finance Guide and how that will inform their strategy for increasing awareness of understanding finance options.
The Government welcomes this recommendation. The British Business Bank (BBB) produces the Business Finance Guide in partnership with the ICAEW and 23 other signatories who collectively represent over a million businesses with a wide range of business interests from manufacturing and export to crowdfunding and innovation.
ICAEW members play an important role in spreading awareness of the guide to all forms of businesses in the UK, as do the other trade bodies and industry groups that participate in producing and disseminating the Guide.
Other BBB delivery partners that are key to reaching hard to reach customers include the Start-Up Loans Company and its network of Delivery Partners. The Start-Up Loans Company works with entrepreneurs and new businesses whose owners would typically find it difficult to access business finance and may lack the experience to seek advice through traditional routes.
Local Enterprise Partnerships, which have agreed to distribute the Guide, have an understanding of the needs and characteristics of hard to reach groups in their local area. Responsible Finance (formerly the Community Development Finance Association) is also a signatory to and distributor for the Guide. Its network of members provides finance to customers who are not supported by other lenders.
The Guide features prominently at events, presentations and speaking opportunities in which the British Business Bank is involved. The BBB hosts a monthly stakeholder meeting with representatives of all signatories to discuss promotion of the Guide, recommend appropriate activities and share best practice. Amongst other channels, the BBB has secured distribution through the Start-Up Loans Company (each new recipient now gets a referral to the new site), HMRC (email and blog) and the Intellectual Property Office. Information about the Guide is also made available to businesses going through the finance platforms referral process.
In June 2016 the BBB launched an updated edition of the guide alongside a digital version, with the latter allowing users to start filtering through their finance options based on the stage of growth that their business has reached. The BBB will continue to work closely with all its partners as well as other interested parties in promoting the guide as widely as possible to small business.
The BBB uses a range of measures to assess the usefulness of the Business Finance Guide for SMEs. Google analytics are used to monitor the number of visits to the Business Finance Guide website via each referral channel. This information enables the BBB to discuss promotional tactics with partners. The BBB also uses customer journey analytics to analyse how visitors are using the site, what content they are engaging with, what videos they are watching, etc. This information is used to update and improve the digital guide - both in terms of the content and navigation of the site.
The BBB currently measures the increase in awareness and take-up of alternative finance products by conducting an annual survey of a representative sample of SMEs that includes questions on awareness of different types of finance and specific providers, as well as actual use of these options. Using these survey data, the BBB tracks changes in the awareness and provision of different finance options over time, including alternative finance products. The BBB also uses information provided by representative bodies of alternative finance providers and annual publications such as the NESTA reports to corroborate survey data.
We recommend the Government sets out in its response to this Report how they intend to monitor the implementation of the Small Business, Enterprise and Employment Act 2015 and, if need be, review the Act to ensure the banks are fulfilling their obligations to provide data when they are required to.
In April the government introduced improvements to SME data sharing by requiring designated banks and Credit Reference Agencies to share SME credit information with alternative finance providers. This will increase competition in SME lending by making it easier for challenger banks and other lenders to make good credit decisions on SMEs, and help level the playing field by helping SMEs access finance from a lender other than their bank. The government expects this data to begin flowing shortly.
In its response to the Competition and Markets Authority’s retail banking investigation, the Government committed to reviewing developments in sharing SME data, including the implementation of the SME credit information policy, to the Competition and Market Authority’s suggested timescale of summer 2018.
At the same time, following that investigation the Competition and Markets Authority has ordered the nine largest UK current account providers to deliver a full open API banking standard by early 2018, through which they will share data with other providers and third parties. An API is an Application Programming Interface, a protocol that enables data to be shared between different systems.
The open banking standard will allow authorised third parties to securely access information about bank services, prices, service quality and customer usage, allowing the development of innovative new services tailored to customers’ specific needs. It will help drive competition by making it much easier for customers to manage their finances, compare what different banks offer and understand where they could get a better deal.
We recommend that the Government explore allowing the Credit Reference Agencies and authorised finance providers access to financial data in the VAT Register, subject to the appropriate safeguards.
HMRC is working to allow the secure sharing of VAT registration data with carefully vetted applicants in order to increase the availability of trade credit to small businesses, as permitted by the Small Business, Enterprise and Employment Act 2015.
The Act only allows HMRC to share non-financial data on VAT registered businesses. Sharing financial data would require further careful consideration of the potential impacts on affected taxpayers and would require a change to the legislation.
The Government’s priority is to deliver the existing policy and to evaluate the impact on credit scoring models before considering further initiatives.
We recommend that the Government set out, in its response to this Report, the timetable for implementation of the referral scheme and how it intends to assess its success.
The Government’s finance platforms referrals policy launched on 1 November 2016, and will help SMEs whose finance applications have been declined by their bank explore alternative finance options more easily than ever before. Nine designated banks are required to offer SMEs they have declined for finance the opportunity to have details of their request for finance shared with Government-designated finance platforms. If the SME has consented to the referral, the designated finance platforms are required to share these details anonymously with finance providers on their platform. Finance platforms then, with the SME’s consent, share the full details of an SME’s request for finance with applicable finance providers who have expressed an interest. This policy makes it easier for businesses to access finance when they have been turned down by traditional lenders.
While it is too early to draw conclusions about the use of the scheme, there have already been examples of businesses that were turned down by their bank securing the finance they needed as a result of the referral. The Government is, with the British Business Bank, tracking Management Information including referral levels for each bank and the amount of additional finance made available as a result of the policy. The Government’s commitment to reviewing developments in sharing SME data, as outlined in its response to the Competition and Markets Authority (see Recommendation 6), includes a commitment to review the finance platforms referrals policy.
Together with the SME credit data sharing scheme launched in April (Recommendation 6), this policy is designed to increase competition in business lending by making it easier for challenger banks and other lenders to make good credit decisions on businesses and help them get the funding they need.
We recommend that the British Business Bank’s collection of feedback regarding the Business Finance Guide specifically seeks views on the range of alternative finance providers and the products available. We further recommend that they set out how that will inform their strategy for increasing awareness of understanding finance options, and how the alternative finance sector can be promoted among those in the accountancy, legal and banking sector involved in giving face to face advice to SMEs.
The Government welcomes this recommendation. The Business Finance Guide details all finance options available, including alternative finance. The British Business Bank has taken extensive steps to promote awareness and understanding of alternative finance. A recent example was the Asset Finance Guide, produced with the British Bankers’ Association and the Finance and Leasing Association.
In August 2016, the Competition and Markets Authority published the final report of its market inquiry into retail banking. This included the recommendation that:
Professional advisers, particularly accountants, have an important role in helping SMEs make good business decisions, including decisions about their choice of provider. We are therefore recommending that BEIS works with the British Business Bank and professional associations to explore ways in which their members can channel advice on choice of banks and sources of finance to SMEs.
This analysis from the CMA echoes that of the committee. The Government and the British Business Bank will continue to promote alternative finance options with partners in the advisory community and will support partner initiatives with complementary aims, including businessbankinginsight.co.uk (which gives qualitative information about business banking services) and betterbusinessfinance.co.uk which is a service provided by the British Bankers’ association. This work will be undertaken in collaboration with the Devolved Administrations and the network of Local Growth Hubs in England.
1 Available at http://www.eif.org/news_centre/publications/country-fact-sheets/EIF_Fact-sheet_UK.pdf
3 A list of these banks is available at https://www.gov.uk/government/publications/designation-of-banks-and-finance-platforms-for-finance-platforms-regulations
27 January 2017